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How is FD interest rate calculated?

A fixed deposit is one of the most popular and easy investment options if you want to grow your savings. All you need to do is choose the amount of money to be deposited and the FD tenure for which it will earn interest at a rate prescribed by the bank or any other financial institution. You can easily use an intt calculator to know how much your deposit will earn for a specific duration according to different interest rates. However, have you ever wondered how the interest on your fixed deposit is computed?

FD interest calculation

Financial institutions typically employ two methods to compute interest on your money also termed as principal. This depends on the invested amount as well as the maturity period of the FD. Let us understand both of these with examples.

Simple interest

In this method, only the principal earns interest. The formula for simple interest calculation is PXRXT/100. Here P= Principal, R=rate of interest, and T=duration of investment (in years)

For example, if you deposit, Rs 50,000 at the interest rate of 6.25% per annum for 2 years, the simple interest will be calculated using the FD calculator as

Step 1  50,000X6.25X2=6,25,000

Step 2   6,25,000/100=6,250

Thus, the simple interest earned by you for 2 years is Rs 6,250. This will be added to your principal and you will receive Rs 56, 250 upon maturity of your deposit

Compound interest

This is the second method used by banks to calculate the interest on your fixed deposit. Unlike simple interest, not only do you earn interest on the principal but the interest as well. Let us understand this with an example

Suppose you invested Rs 10,000 for 5 years at an interest rate of 8%. Here is how compound interest will be computed using the FD interest rates calculator:

First-year

The simple interest on your FD as per the formula, PXRXT/100 will be 10,000X1X8/100= 800

The interest of Rs 800 is added to the initial principal amount of Rs 10,000 at the end of the year

Second-year

The new principal for the second year is Rs 10,800 on which interest is earned at the rate of 8%

This is calculated as 10,800x8x1/100 = Rs.864

An interest of Rs.864 is earned for the second year and is added to the principal. So at the end of 2 years, your FD has Rs.11,644.

Similarly, compound interest can be calculated for the next three years. However, interest can be compounded monthly, quarterly, or half-yearly by banks. There is a simple formula that you can use to calculate compound interest on the amount deposited by you

Compound Interest (CI) = P {(1 + i/100)n – 1}

Here, P = Principal, n = number of years; i = rate of interest

So, if you invested Rs 10,000 for 5 years at an interest rate of 8%, compound interest can be computed using the intt calculator as

10,000 {(1+8/100)5 – 1} = Rs 4,693

At the end of 5 years, you will receive a total of Rs 14,693

Conclusion

Before depositing your money in a Fixed Deposit, you can make use of the FD interest rates calculator to maximize your returns. As you can see, you can earn more on your capital if you opt for compound interest as compared to the simple interest method of calculation. The rate of interest of an FD will also depend on the duration and might differ depending on what you opt for.

Make your money work for you and get the most out of your FD by investing smartly using the FD calculator.  Check with your financial institution to know the interest rates for various durations and select the one that offers you the highest interest rate as per your requirements.

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